The International Monetary Fund has thrown its weight behind Brussels in its battle with Italy’s coalition government over plans to increase the indebted country’s borrowing in its next budget.

The Washington-based lender of last resort, which is holding its annual conference in Bali this week, warned Rome to abide by the EU’s financial rulebook or risk a rebellion by investors that could trigger a debt default.

Italy’s populist coalition is targeting a deficit of 2.4% of GDP next year, tripling the previous government’s target, as it pledges more spending despite a huge debt pile, which at about 130% of GDP is the biggest in the eurozone behind Greece.

Brussels has rejected the idea of Italy running a larger budget deficit – the gap between income from taxes and government spending – than previously planned over the next three years.

Italy aims to cut budget deficit after EU criticises spending plans

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Rome is due to submit its draft budget by 15 October to the EU commission, the bloc’s executive arm, which will check whether it is in line with EU rules. The government has said it wants to use a spending boost to kickstart investment and consumer spending to fuel growth.

The IMF’s chief economist, Maurice Obstfeld, said it was important to maintain the confidence of international money markets, especially when the risks of an escalating trade war and a damaging no-deal Brexit were rising.

The IMF’s intervention could prove significant while both sides seek allies in the budget battle as it is considered an important ally by governments as they seek to persuade electorates that debt-fuelled spending could lead to a collapse in confidence and rising borrowing costs.

Obstfeld said EU rules that prevented governments adding to already sky-high levels of debt to GDP should be maintained in the current unstable economic climate.

European markets fall after Italy's deficit-widening budget plans

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Speaking in Bali, he said: “Our concern about Italy is that there is a real imperative for the fiscal policy to maintain the confidence of markets. And we have seen the [government bond yield] spreads increase over the past months. This has certainly contributed to our downgrade of Italian growth and makes the economy more susceptible to shocks.

“So we think it is important that the government operate within the framework of the European rules, which are also important for the stability of the eurozone itself.”

Italy’s finance minister, Giovanni Tria, confirmed on Tuesday that the government planned to run a budget deficit of 2.4% of GDP next year but said he wanted to begin “constructive discussions” with the EU and see a calm “tone” prevail.

Addressing Italian lawmakers in Rome, Tria conceded the government had been concerned by investor reaction to Italy’s budget plans, which has resulted in equity markets falling and bond yields rising, signalling an increase in government borrowing costs to the highest levels since 2014.

European stock markets staged a partial recovery on Tuesday, with major indices closing higher following a sharp sell-off a day earlier. Italy’s benchmark FTSE MIB closed up 1%, but it was not enough to erase a 2.4% drop on Monday.

“Although so far there hasn’t been an explosion as some feared, we are of course worried,” Tria said. “As a responsible government, we aim to explain the budget and thus guide investors in our meetings in order to calm markets.”